Bonds Mixed After Fed Commentary Offsets China Restriction Fears

Treasury yields mixed amid dovish Fed commentary, concern of more China COVID shutdowns to come. Treasury yields were mixed today, the 2-year yield rising ~2bps and the 10-year yield closing little changed on the day. While concerns about COVID in China and a supply chain issue contributed to an upward pressure on yields, dovish Fed commentary offset much of this sentiment. San Francisco Fed President Mary Daly said that the central bank must “remain conscious of this gap between the federal funds rate and the tightening in financial markets. Ignoring it raises the chances of tightening too much,” while Cleveland Fed President Loretta Mester said that she is open to slowing the pace of rate hikes.

Tighter bank lending standards may accelerate impact of Fed hikes. The Fed’s Senior Loan Officer Opinion Survey, which gathers data on lending standards and loan demand as reported by bank lending teams, showed that banks imposed stricter lending standards across a range of loan categories during 3Q22. Approximately 40% of banks said that they “tightened somewhat” on C&I lending standards. Across consumer loans, banks reported tougher standards, but kept auto loan underwriting mostly unchanged. Stricter underwriting will make it harder for businesses and households to gain credit to borrow and spend, which goes hand-in-hand with the impacts of higher interest rates.

Day ahead. Fed voters Loretta Mester (hawk), Esther George (neutral), and James Bullard (hawk) will make public comments tomorrow. There is not much notable data to be released tomorrow, with crude oil stock changes (4:30 PM ET) the headliner.